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As founders and operators push deeper into 8-figure range, the challenges shift from simply growing revenue to building real durability in both cash flow and equity value. After working with over 100 Shopify and DTC brands, here’s how we think about building healthy, scalable businesses that can withstand volatility while compounding long-term value.
In today's conversation, we dive into "What Does A Healthy 8-Figure DTC Brand Look Like?" in 2025, starting with:
Jacob Paduch (00:01)
Hey guys, we're live. So today we're going to be chatting about what it looks like to run and build a healthy e-commerce brand specifically in the D2C space. So we're going to chat a little bit about what that means, what the metrics we look at are, quick intros on our side. So I'm Jacob Paduch, one of the founders at Aplo Group, which is a growth marketing agency that works with scaling D2C brands in the seven and eight figure space. And my co-founder, Dylan Byers, who I'll let him introduce himself.
Dylan Byers (00:50)
Yep, co-founder here at Aplo Group. I'm mostly responsible for overseeing client strategy and a lot of our team here at Aplo and trying to scale brands. It's a great time and looking forward to chatting about what healthy brands look like in 2025 and beyond.
Jacob Paduch (01:06)
Awesome. So we've had the pleasure of working with over a hundred of these DTC brands, mostly in the like eight figure space in terms of scaling, but also a good amount in the high seven figures as they kind of breach that sort of next level of revenue. And there's a lot of things that change about those brands as they kind of approach that. And there's a lot to consider, especially if they're high growth brands. So trying to scale, trying to keep up with the growth that they have. And I think there's oftentimes a lot of pieces overlooked that are not just solely ad account based. So I'll hand things over to Dylan and maybe we can sort of level set for everyone. What are we looking at when we're working with brands, when we're bringing you brands on board or just in general, like how should brand operators think about the equity value they're building inside of their DTC business?
Dylan Byers (01:55)
Yeah, so first things first, like from a health standpoint, I kind of start out by defining like what is health. And I lean towards some amounts of healthy growth as like one of the items, but more importantly, healthy profitability. And at a high level, when you think about profitability, there's kind of like two areas that you can look at to assess the kind of continued viability of the profitability of a brand. One would be like the amount of contribution margin dollars left on first time customers after the cost associated with acquiring them. So like, let's say that you are, I don't know, super simple scenario in this hypothetical. Your first time customers spent a hundred dollars with you. You have after all your variable expenses, you have 50 % margins and you're spending $40 to acquire the customer. You got $10 of margin left in that scenario. And as you kind of scale over time, generally, as you spend more money on ads, especially if you're just scaling linearly within the same kind of platform or ecosystem, you'll see that margin degrade. Now, sometimes like a doubling in volume, even if you only see like a 10 % reduction in margin leftover on that acquisition, it's a good trade. But eventually you start kind of breaking the, you often start kind of breaking the logic on. rational continued growth. The flip side of it.
Jacob Paduch (03:23)
And just sorry to double-click on that Dylan, when you say margins, contribution margins, not like final, you know, net margin after all fixed costs, right? Because there's also volume to consider, which I'm sure we'll get into later, but just for the audience, like, we're still talking in contribution margin terms.
Dylan Byers (03:38.688) Yeah, so basically profit prefix costs of profits from selling goods after your variable cost, cost of goods, logistics, gateway costs, and then your ad spend. And then there's also the flip side of it, which is obviously your returning customer revenue and how that grows over time. Because depending on how aggressive your lifetime value kind of increases and how fast it increases, again, you can sometimes justify further growth if that equates to further profit growth, even if you're really, really, really limiting that first time customer profitability at certain extremes, or in some cases actually even going negative. So when you think about like, how do you assess how healthy of a position you are in? It's looking at those two sides of the coin. And then, you know, being real honest about like, hey, like, if I keep on pushing, am I really going to squeeze that much more profit out of the business right now? And if not, you of have to go back to the drawing board and say, hey, how do I find out a way to like acquire customers more efficiently? How do I change my offer fundamentally? So I create more contribution margin dollars on that first order. Oftentimes that's going to be something that you kind of look into in terms of like other product development or how you think about bundling slash anything that can positively increase AOV without hopefully having too big of an impact on your conversion rates or how do you kind of start thinking about LTV a little bit more? And the LTV one's arguably harder because naturally it's somewhat dependent on the product that you sell. Even if you have great retention strategies, at the end of the day, you're only gonna be able to make some percentage improvement on that. Fundamentally the product to some degree kind of sets the range. that's kind of where you kind of have to start assessing like what is the next thing I can kind of adjust as an operator via the things that I sell.
Jacob Paduch (05:27.913) Cool, so there's a ton in there. Let's start with product and how that ties into some of maybe these intrinsic qualities a business has. So you mentioned LTV, for example. There's also constraints on what offers you can test, et cetera. Do you want to maybe level set like what, let's just say in the clothing, apparel, CPG, and just generally sub $500 price point category, how we should sort of think about the product. what products typically win, what's the makeup of these look like, et cetera.
Dylan Byers (06:02.551) Yeah. So it really, really, really depends on like at the end of the day, what you are selling in the CPG space, especially depending on again, what you're selling, you can often, a very common strategy is buy more, save more and save even more. If you are going to subscribe and save that, that is like one of the best funnels because in that strategy, you basically often end up increasing AOV on first order, but you also will often get higher LTV if you can get that subscribe and save often. So that's like a prime example of like, you're not, if you're not doing that, you should probably do it. And then once you start, it, start, start implementing that strategy, how are you continuously split testing the different kind of mechanics of that bundle over time? Like, is it a free pack, a six pack and a 12 pack at what price point, how are you doing your price anchoring? How ultimately like usually the biggest leverage is going to be, how do get people on subscribe and save? There's some extremes of this where like, if you have some, so much quantity on order one, that you can actually cause people to like cancel their subscription because there's too much of a, they physically cannot consume the product enough prior to the next subscription renewal. And there's some pros and cons and some trade-offs there that you have to be cognizant of. With clothing and apparel, it's a little bit more difficult. Oftentimes this is probably gonna somewhat be a byproduct of having more variety of products that people actually like. It also depends, like if you're selling basics versus like prints. So like if you're selling basics, you might be able to get a lot of people to buy in bulk. So like five black t-shirts or at the very least you can like choose the colors you want. Because if you like the fit of a shirt, you might be willing to kind of change it up with different color ways, et cetera. But when it's a print, it's a little bit more difficult because you're going to have like, I had to like this style, that style, that style, that style. And that's when like variety matters a lot. So trying to think about like, can I, again, well, how can I adjust the product mix to really encourage that like high AOV growth? And then how do you actually execute that on the website, be it like with your cross sales, et cetera? So I think CPG, it's often a little bit easier to solve these problems. Clothing and apparel is almost a little bit more hits based, meaning like you kind of think of it as like each product you kind of put out there. It's like, is this going to take off? Is this going to take off? Is this going to take off? Because you're kind of looking for that, like that next little micro trend within your store, if you will.
Jacob Paduch (08:28.957) Totally. It makes it actually very seasonal in that way, right? Where you're kind of taking seasonal swings, seasonal bets, and that's also like a really... I mean, we might want to double click into the working capital challenges of that, but maybe not now. But going back to subscribe and save, are you a fan of brands that lock subscribers into like a three month minimum, or are you more of a fan of just let the... If the product is good, if the subscription is natural, subscribers will choose to stay on it and... model your LTV curve off of that rather than basically locking brands or people, excuse me, in with a brand to just ultimately churn after that minimum's up.
Dylan Byers (09:07.531) Yeah, the lock-in strategy is like super uncommon in the D2C space and a lot of platforms have like, you know, like limitations to even implement that. So the extent to which you could possibly do a lock-in is like by just charging more upfront for like multiple upcoming rounds. So ultimately you're normally just going to be going month to month or, you know, period to period because some subscriptions might renew every two weeks, four weeks, six weeks, eight weeks, three months, et cetera. And ultimately it's kind of, you want to make sure it's just very easy for the customer to decide what they want based off of what they expect their purchasing habits to be. And that's an important thing to call it too, because like, depending on what you're selling, it might be kind of easy to estimate consumption, but like for some things, maybe not. Like, let's say you're selling like, I don't know, like some sort of like a... bar or bite or something, and you kind of can estimate that you're gonna consume one per day as a snack. But if you're selling like some sort of topical skin cream, you don't really always know how much of that you're going to go through. thinking about how easy it is to estimate should also be heavily weighted with like, okay, if it's not easy, and a lot of these customers are not gonna know how fast they're gonna go through my product. In that situation, I wanna make sure I'm being very, very proactive about getting them to... potentially change the cadence at which they subscribe? Because what you ultimately want to avoid the most is that like first renewal cancel. How can I make sure that I'm treating these customers so well that they reduce the probability of that occurring?
Jacob Paduch (10:44.169) 100%. And I mean, I think we'll talk about retention as an arm of this later, but I feel like retention is also such a, well, everyone knows the value of retention, I think, but in specifically what you're describing, like that behavior of how quickly can someone consume a product, how can they get the most use of the product? Like that actually sometimes takes, depending on your product, a lot of like education and buy-in from the customer too, to actually use this product as it's intended to be used, whether it's a daily frequency or a few times a day, et cetera. Like someone could buy a topical product for instance and just forget they bought it and not use it and or not use it enough to see value from it and think it just thinks it just doesn't work. But the fact is like unless you use it every single day, it's like, yeah, this serum or whatever is not actually going to be beneficial to you unless you actually commit to using it every single day as part of your routine type of thing. Whereas there are some things that are more obvious where it's like you bought something that you ingest and you scoop it into your coffee every day or it's, you know, something you take after your workout or before your workout. Like those are a little bit easier to form habits around, but those things that like those products that aren't, you almost need that extra education to happen and that buy-in from the customer. And oftentimes that's very difficult to deliver and you have to deliver that through an effective post-purchase strategy.
Dylan Byers (12:01.485) Yeah, no, 100%. And like to take it back to like what makes a healthy e-comm brand in 2025, like let's say you're kind of one of those brands that are like hugely first time customer dependent. And let's say you have like, I don't know, go back to like a similar case I just explained. Like let's say you have, I don't know, a hundred dollar first order AOV, 50 % margins, and you're acquiring it like 45 bucks now. You got like $5 a buffer. All it takes is like, you know, something to go wrong with your acquisition channel for a couple of months. This, that, the other thing. And if you have very poor LTV, all of a sudden you are in a position where you go from creating positive contribution margin dollars to basically being break even. And this gets into like the, when you say healthy, it's like the financial health most of the time. There's obviously these other like, like brand health, like how much people recognize you, et cetera, et cetera. But like, I think traditionally. people are talking to about financial health. And it gets really difficult to like manage the risk in these businesses when there is very high volume, but very slim margin, especially on first order with limited LTV, because it's not necessarily that you should not go and do crazy volume. Like there's a world where if you have like a huge total addressable market and you like you have a healthy balance sheet, you can like make those big POs and just go for it. But... If you do not have a healthy balance sheet, you have to understand that like there is a world where you may have to significantly reduce volume for a period while you try to refix your acquisition in the event that something does happen and all those contribution margin dollars that were there disappear for some time at least. So the businesses that have the HILTV, it's actually a much safer business model from a PO bet. I don't like using the word bet because obviously there's a rhyme or a reason behind how much you buy, but ultimately every PO you do place to some degree is a financial bet that something is going to happen in the future, which would be like a return on invested capital into that PO. And the reason why these high LTV businesses are potentially safer, but not necessarily always better, there's pros and cons to everything, is let's say that you are expecting, you're going to buy some units and you expect to sell through it in the next three months.
Dylan Byers (14:21.877) In the event that your first time customer acquisition does have like some sort of terrible scenario that you can come up with and you have to pull back acquisition dramatically. You can usually like underwrite that and understand that, Hey, yes, that may happen, but I have all these customers who are likely to still buy it anyways. And then the worst case I sell through it instead of three months, seven, eight months, six months, whatever it is. So you have like a kind of a fallback plan to how you're actually going to get your cash out of those units. If you don't have that return customer base. that really is gonna buy those products from you, you gotta sell it to first time customers. And what happens if you can't do that profitably? Well, maybe you pull back on spent and maybe that's okay and hopefully that's okay. But it depends on how you finance that inventory and how fast you gotta pay that financing back. And that's like one of the scariest places to get to is like when you're no longer creating that first order margin and you have to pay something down via that inventory. Generally speaking, I find it when chatting with brands, it's a little bit more easy to wrap your head around the risk when you have a high LTV. Not to say you can't make big bets when you're first time customer heavy, but you just gotta be a little bit more careful in my opinion.
Jacob Paduch (15:36.65) 100 % I mean there's no there's so much there that you just said that that's 100 % true when it comes to we we said we'd revisit this and it's that minimum volume that you need to maintain as well because ultimately if your Contribution margin dollars in like as a dollar amount drop too low You also don't have the ability to cover all the other operations costs basically so do you want to touch on that and how branch it thread that needle because like Yeah, if you're moving units at breakeven, you're actually not rebuilding strategic cash reserves, but also like there may be a benefit there if you have like, basically if you're too long, some inventory and you need to free up that working capital, but like just on a very high level, like can you explain that kind of risk and like how brands should sort of like think about volume as it pertains to costs as well? Cause there's obviously contribution margin that we've been kind of throwing around at this point, but also you need a minimum volume to cover things that are not.
Dylan Byers (16:13.101) Yeah, the-
Jacob Paduch (16:32.691) part of that variable cost equation.
Dylan Byers (16:34.775) Yeah, I think that gets into like, you probably want to, where possible, not allow your fixed costs to become higher than the contribution margin that your return customer revenue creates every single month. So that even if you had to turn off your ad spend completely, or like, you know, that's pretty unrealistic. I shouldn't say that, but like, if you had to like go from like, reduce it by 80 or 90%. because that's all you can spend, some terrible situation. At least you have that kind of baseline. Now that gets into like, if you're not continuously refilling that like group of return customers, how fast does that degrade? And it's also important to understand. And that's how you can kind of think of like your PNL runway. So if you basically estimate that you're going to have $100,000 of the month in return customer revenue, and then over the next six months, that's going to slowly degrade to 80,000 in this terrible situation where you have to pull back on spend super aggressively. At what point does that $80,000 a top line not produce enough contribution margin to cover your fixed costs? again, like sometimes when we kind of say these examples, it's like easier said than done. Like certain businesses require like a larger team or a leaner team. Obviously directionally, our industry has gone leaner, especially all the AI tools. Leaner is probably going to become more and more and more prevalent. But normally it's like the more complex businesses with more SKUs in our experience that have larger teams. Cause there's just more to manage. you got basically every single offer or SKU you got to do the same stuff for whether it's ad creative, whether it's like trying to improve the product, negotiating the product, getting the product, shipping the products, maybe there's compliance associated with the product. There's just so many things that added SKU count increases complexity. And just to add like the other extreme is like. Why CPG is so popular and probably why it does so well in the marketplace right now in terms of exits is because A, the margin and stability of the business is often healthy if you can have effective acquisition because the LTV, if the product is good, is going to be very high most of the time. And then that basically allows you to have very healthy margins as a byproduct and the LTV brings that stability. But also you can just often have a very lean team running CPG because you don't often have that many skews.
Dylan Byers (18:58.763) So that's like an other added benefit. It's like your fixed costs as a percentage of revenue in that category is often just lower. And it's to say other categories can't be good. It's just like there's a reason why you so frequently see these great outcomes, especially recently in that space.
Jacob Paduch (19:13.481) That makes perfect sense. other words, durability of revenue is highly correlated with LTV, which if you draw that back as a risk management decision, your best risk adjusted bet is to have and be in a product category with a product that has high intrinsic LTV because that creates some conditions of predictability within your business. And ultimately, I think that also speaks to who is buying these businesses. are strategic acquirers that want some sort of predictability in terms of where they can cut cost, but also what they can sort of do with the existing customer base and how they can sell into it and what that's going to mean in terms of revenue dollars in the future. So a hundred percent. Let's jump into ad accounts and ad account metrics, new customer. You touched on the acquisition piece just now, some of the risks, I guess, also when there's not really a high LTV component there. Do you want to chat through maybe like how We at AppLoad generally look at ad account metrics, how operators should be looking at new customer acquisition, like conceptually.
Dylan Byers (20:15.297) Yep. Also just one final point on the, CPG thing is that sometimes the high LTV categories come with high acquisition costs because that's like the place like people understand the opportunity on the long end. from a sheer competitive dynamic standpoint, it re-raises the cost and acquisition. it's not, the grass is not always greener, but sometimes, but sometimes it can be, but
Jacob Paduch (20:36.869) Yeah, totally. Sorry, this is like this is a different podcast topic altogether. But I also feel like what you said about lean team is like if everyone goes lean, where does the margin get eroded, you know, in that model? Right. So 100 percent. But I feel like at every point, like you optimize here, the market figures it out. It optimizes that point and then margin gets competed away elsewhere. So, yeah, whether it's lean team or CAC or elsewhere, like that's I think that competition is always happening. But yeah, sorry. To your next point.
Dylan Byers (21:06.285) I know, I think that like ad account construction and how dynamics are.
Dylan Byers (21:16.717) Ad account construction and the unique setup of a business, be it like a high first-end customer business versus high LTV business can kind of vary. I think that like our industry as a whole loves to talk about, do I use cost caps? Do I do lowest cost bidding? Do I run ASC? Do I run Target ROAS? Do I run an accelerated bid campaign? Like all these different bidding methodologies. And I think that like high level at Apple, we kind of think of them as like all as tools in the tool belt. And there are different brands where, you know, at different times in their growth phase and depending on what they're trying to optimize for, for a given time, different, different tool, different campaign structures might make more sense from a bidding standpoint. And also just sometimes something that works well for one brand, just for whatever reason in another ad account does not like you can't always copy and paste the same thing from one account to another. Not that account structure is necessarily as complicated as it used to be. cause usually consolidated account structures are more common nowadays. but there is still some difference account to account and not just, and you kind of have to be flexible with how you want to run things. I'd say that like at a high level, if you're thinking about like cost controls, cost controls are great because ultimately you can set some sort of a cap or theoretical cap on what you're willing to pay for a customer and or what you're willing to yield from a customer, be it with target ROAS. In practice though, it's not always perfect in terms of. and that are actually hitting that mark or we can insert some other platform, ad platform here. But if you're a brand that is like very much first order dependent and you really need to make sure you're capturing that margin on first order, sometimes going towards a cost control strategy, no matter which one you choose, is going to be a very effective place to be. Where the issue gets in with some of these categories though is like, so like I'll use clothing and apparel as an example. Often clothing and apparel LTV is not that bad if you look at it on like a. very long timeframe, but the velocity of it is slow. So like, you're not really getting that like super fast payback. And also clothing and apparel as a category has one of the highest like, it's like, it's like sometimes like where money can go sit on a shelf where if you get your, inventory bets wrong, you're just going to have inventory sitting on a shelf, especially if it's seasonal and that's not a productive, that's not being productive for you when it's, when it's there.
Jacob Paduch (23:30.142) Let's double click on that
Dylan, actually. Like you mentioned velocity of LTV. You're talking about basically like having to warehouse a seasonal product for potentially a year or nine months or however, like whatever the cycle of the product is. That has huge implications, both from working capital standpoint, but also like the implied growth rate that you can actually sustain when your velocity of LTV is not very fast. Like you might have great three year LTV, but you're like 30, 90 day LTV is like non-existent. What implications does that have on your growth potential?
Dylan Byers (24:06.835) very, very scenario based. Like if you have a good strong long-term LTV, ultimately you can still model that out, but it just increases the need for you to have those contribution margin dollars coming in faster. And that might be on first order because ultimately something has to pay the bills. And if you have to wait like two years to really get the bulk of that return, return customer contribution margin, that's just going to be like a hard thing to actually like properly like financially wrap your head around and effectively execute on. But at a high level, like There's a time and a place for different cost controls for clothing and apparel. Like an example, when like the cost control strategy may not necessarily make no sense, but like it's, it's this, like, it's a, it's great to say, Hey, I'm going to like set this cost cap because I the margins make sense for me. And I'm going to go and just leave it there. But all of a sudden, if you have a super seasonal product and you are basically not going to be able to sell it for the next nine months, if you don't sell it in the next two weeks, how do you go in and make sure you adjust from a cashflow optimization standpoint to increase the chance that you get through those units? And you have to a real honest conversation where it's like, okay, originally I wanted like $5 of the contribution margin on first order on this product. Do I want zero or do I want negative $2 or negative? there's a, in general, though, the workflow at Apple, we go down is like, if we're overstocked on something and we're concerned about not being able to sell it soon because of like the seasonality associated is like first things first is how do you go and sell it on your own channels where you're going to generally have your highest margins. So email and SMS first. And then also just like organically, like telling clients like, Hey, if you're like heavily overstocked, it's probably why you're going to have like an on sale, like section or like we made too much sort of sections type of thing. And then, um, um, from there, if that doesn't effectively move the units, you take the target on ads down, whether that's on the lowest cost campaign, highest value target cost cap, whatever cost caps, just an easy example, cause it's so clear. Um, and then do you take it to zero and then. In what case do you take it below zero? And that's where you don't want to be. You don't want to have to take it below zero, but sometimes it might make sense.
Jacob Paduch (26:09.757) For sure. So I know we're talking about new customer, but obviously I'd say the margin discussion kind of appears everywhere, right? At what point do you think it makes sense to go and finance a very large PO at an MOQ that maybe gets you a better per unit cost that can improve your actual like accrued, let's say P &L. versus the implications of taking all of that money and putting it into potentially multiple months of inventory and essentially locking that up. Because even just from like a theoretical standpoint, the time value of money in that means you're locking it up and you're hoping that it's going to be more to you in the future if you manage to sell through that. But at the same time, like you're forgoing every opportunity possible that you could use that money today, including like the risk of taking a lot of working capital, tying it up in inventory, like just basically putting it on a warehouse shelf, not having it to basically cover any operational costs, any changes in the business, all that stuff. So how should brands think about that? Cause I think that's one of like the most difficult questions is like, well, we think we can keep up with this growth rate and we think that we'll sell through these. And if we order this much, we can get like a significantly better per unit like cost. But with that, you also just turn your cash conversion cycle completely upside down and have like, like is that worth the six, you know, six months of having to stress and sit about on that inventory? Just curious your perspective there.
Dylan Byers (27:46.124) I I think that like, depending on the cost of the capital, the confidence you have in moving through the units and the ideally the lack of seasonality, like the general consistency, there is a world where depending on how like the volume savings works, it's just a better, it's a better investment to do that giant bulk order. I am like super, super, super cautious when it comes to seasonal products. And it's just because it's probably one of the biggest mistakes. One of the most common mistakes we see, it may even be the most common, but definitely up there, is when you're going from being like a mid seven figure brand to getting into the eight figures or multi eight figures, especially depending on where your balance sheet is at, because a lot of the times you kind of like, kind of get to like this like five to $10 million mark. And some brands have a great cash position, but a lot of brands just got there by like, it's a grind. Like you need to hire people to do things, to get things done and to grow. but you're not creating that much contribution margin dollars when you're doing a million, 2 million bucks a year as a DTC brand. So it's like, normally when you get here, you're finally producing profit and the cash position isn't great. So you're making the, of a sudden, bigger bets in proportion to your balance sheet than you've probably ever made before. And that's when you have to start having like real honest conversation with yourself about like how big these bets can be and how fast you can grow, depending on how you're trying to go and finance these things. But when it comes to seasonal products, like I would generally veer towards, I'd rather sell out than have too much. And again, like maybe that's like a cautious approach and not being aggressive enough. And like, again, this is like a uniquely personal decision sometimes. Obviously you want to have it be backed by a forecast that you can kind of expect something to happen, but I'd rather sell out, do it very profitably. Ideally still growing obviously, but like overstock is one of those things that we've seen really like hurt, really hurt. brands time and time again and it's like the most one of the most common mistakes and it sucks when it happens.
Jacob Paduch (29:47.402) I also don't think founders and operators get enough credit for this, like those first like years of growing into the mid to high seven figures are really tough, like really, really difficult because the amount of room you have to distribute like cash even back to the shareholders, like yourself, if you're the sole owner or part of it's virtually nothing. It's because you have to reinvest almost all of it into growing to maintain that sort of trajectory.
Dylan Byers (30:04.525) Like, next to nothing. Yeah. There's obviously exceptions. Like, yeah, there are obviously exceptions. there are, there are, there are like, there are brands up there that do like low seven figures like in relation to the revenue and like how profitable they are. Like you actually can do like decent, like decent profits. But especially if you're growing like e-commerce business, so there's these cash eating machines. Cause like you're so incentivized to just take the dollars that you profited and go and buy more inventory. because most likely that's gonna be the best return on invested capital you can get unless you have like some other alternative like a financial vehicle that you can invest in. But for like most brands, like that's gonna be where you go. But then it's like, okay, well, how much do you take out? Like at what point do you start taking those distributions and how big are they? And like, that's a whole other thing a little bit outside of our like core area. But I was talking with John recently, know, from the Free to Grow team about it. So it's top of mind for me.
Jacob Paduch (31:05.577) 100%. I mean, even though, even just trying to build that returning customer base, that's large enough in terms of like the revenue that's driven so that if you have fluctuations in your business, you're not solely reliant to get on the new customer side to cover absolutely every cost in your business. You are incentivized to grow pretty quickly to get to that point just from a risk adjusted standpoint, but it inherently is also a very risky path getting there. If you're not able to distribute anything back or you're trying to take all the excess cash in your business and put it right back into the machine just to kind of get to that minimum sort of threshold where you're like, okay, at this top line with this margin, we know that this component is gonna be all return customer driven. Therefore, if you work backwards on that number, it will cover our operational costs at these levels on purely just return customer revenue. Therefore, you can actually go and redeploy all your featured cash into just kind of scaling. But it takes a really difficult path to just get there. Maybe difficult is the wrong word. Like it is difficult. but also it's a very, there's a lot of risk management along the way, let's say, to get there. And a lot of confidence also to get to that point.
Dylan Byers (32:09.933) That's also the alt. Yeah, no, totally. 100%.
Jacob Paduch (32:16.925) Let's chat about retention a little bit. So we were just chatting about obviously what the return customer revenue piece means to a business, but I guess How should brands think about customer retention as a strategy for growth? Obviously we all talk about post purchase. We all talk about the role that email SMS plays, but functionally like, why do we talk about these things at all? Like what, why does it matter?
Dylan Byers (32:41.597) think that as a channel, the sheer revenue they drive is obviously tremendous. But one of the other ways you can look at it is to your point, how it actually impacts acquisition costs, new customer ROAS, and LTV. I didn't know email and SMS attribution is a whole other can of worms and how you measure it. But at a high level, one thing it can do is help with your new customer ROAS and acquisition. initiatives, especially if you're a product that is more expensive and or complicated with a slightly longer purchasing path, that education piece is huge. think email often just looks like it's looked at as like solely an LTV slash retention thing, but ultimately it can be a huge variable in the acquisition piece. And then obviously there's the retention piece as well and how you're kind of continuously continuing that relationship with the customer, educating them on new products or new things or improvements, this stuff, the other thing. and then trying to facilitate that LTV growth. I know like LTV growth is great and with good retention strategies, hopefully that can be improved. I think directionally, if you're not doing it, you definitely should be. But oftentimes the product makeup itself is like the biggest variable in that LTV consideration. Or like one small example is like if you have a product that can be subscribed and saved, like how are you using email and SMS to... kind of convert as many people as possible after they've done that one time purchase and to subscribe and save. Like there's certain kind of core offer types or levers you can take in the channel that often will yield better outcomes. But yeah, at a high level, you know, you have, like if you want to be doing like, optimizing your brand, like it's an integral part of an effective growth strategy.
Jacob Paduch (34:26.345) 100%. One of my favorite stats is when you look at like a typical Klaviyo account, 50 % of attributed revenue usually comes from flows. Maybe sometimes it's more, maybe sometimes it's a little less, but it's like in that 60-40 band and flows make up less than like 5 % of overall volume, depending what your campaign cadence is. I love that stat because it's really these like high intent kind of moments along the customer journey that seem to drive up at least half. in most cases of the revenue that's coming through that channel. Do you want to speak to maybe how like post purchase plays into that? Cause that's obviously one of the largest levers for LTV as well.
Dylan Byers (35:05.239) Yeah, no, for sure. I think that with post purchase specifically, again, the product, it's hard to give generalized advice because product and offer make a huge difference. But like at the end of the day, you want to try and make sure that you are effectively following up with customers, checking in on them, giving them like, giving them advice on how to get the most utility out of the product or learn more about the product and then start. cross-selling them complimentary products. That can get into like pretty nuanced branching. At Applo, we generally first try to just make like a really good core branch. So like, if you are going down a post-purchase funnel, like instead of having like a gazillion branches based off of what you bought, like oftentimes just by split testing the highest leverage things, which are often some of the variables at the beginning of some of these flows, that's gonna be where you can get a lot of leverage. And then over time, as you kind of optimize these flows, it can sometimes make sense, like, especially for larger catalog stores, like maybe someone has purchased this category of menswear and I'm going to have a flow post purchase specifically for that. And again, like you can turn these things into like unnecessarily complex funnels really quickly. You want to make sure you're always kind of thinking about what's like the next most high leverage thing I can do. But over time, getting that product specificity into the post-purchase funnels generally makes sense.
Jacob Paduch (36:33.705) 100%. Let's go into the financial KPIs and financial metrics. Obviously financial modeling and forecasting is a very big piece of what we do here at Apple, also a big part of the overall strategy for mapping growth. Do you want to dive into what that kind of looks like? What are the high level KPIs that typically need to get established just to even have like a baseline understanding of this is where the business is. This is the kind of path we can chart for growth and how we go about that.
Dylan Byers (37:03.403) Yeah. So when it comes to the forecasting side of things, essentially we're looking at two things. there's more, like to keep it fairly high level, it's your cohort retention rates. So basically looking at your historical retention, that allows us to understand based off of all the customers you've already acquired and then all the customers we think you may acquire in upcoming month, two months, three months, et cetera, how that then compounds return customer revenue growth over time. and ultimately how that compounds return customer contribution margin dollars over time. The other side of that is the first time customer piece and basically looking at your historical acquisition trends, understanding and giving an expectation on different volumes of ad spend, what that new customer efficiency could look like. And therefore again, your new customer contribution margin position over time from there. For a lot of brands, when we talk about KPIs and growth rates, one of the limiting factors is that like, not limiting factors, like constraints I should say, is let's say you have as a business a target of 20 % contribution margin dollars store wide. And let's say you're running your OpEx at like 10 % and then you have 10 % of profit left over. Well, if you want 20 % contribution margin dollars, but on first time customers, you're only getting 10 % contribution margin dollars after ad spend. There's going to be some constraint there where your growth rate on like month over month growth. is gonna be somewhat constrained by how fast your return customer cohorts compound. Because ultimately, if you kind of think of ad spend as only being associated with first time customer revenue for this simple example, probably it's not the case, but let's just pretend like you do for a second. And then your return customer revenue kind of compounds over time. In that kind of pathway, what happens is... you need that return customer revenue where it has like maybe it has like 50 % contribution margin dollars in this kind of thinking process per unit sold. You need enough of that to supplement that 10 % contribution margins orders on a per order basis to kind of average out to that 20 % target that you're going towards. So a lot of the conversations we have with brands are often like, hey, like we want to have X percent profitability, but we want to grow at Y percent growth rate. And sometimes the growth rate
Dylan Byers (39:20.429) exceeds the profitability conversation. And then that gets into like, well, are we okay going lower than 20 % as a in that terms? And usually that depends on if they're more comfortable going for like, dollars over percentages, meaning like, I'm confident even though I'm to go from 20 % contribution margin to I don't know, 17. In that scenario, I'm still capturing more contribution margin dollars, and maybe that's okay. But that's when having like a really strong finance team is imperative to actually manage these things. because when you get to kind of the more extreme versions of this in terms of how hard you may push, sometimes the risk profile increases and that's not necessarily a problem as long as it's good, as long as it is a still good risk adjusted return.
Jacob Paduch (40:03.369) 100%. Moving on to the creative and offer testing piece, obviously everything has a through line. So from the velocity of LTV to customer attention to what we started talking about, which was product, right? And what the product's actual intrinsic qualities are. Let's chat a little bit about what the creative testing strategy looks like and also in that obviously offer and product positioning, because that's, it all does come back to product, but there's a million ways that you can obviously position. So I'm curious there how you want to take that one.
Dylan Byers (40:33.665) Yeah, I mean, it kind of gets into like how you're prioritizing what offers you're selling. And it can, it can vary a lot brand to brand. I'll keep this higher level. It probably makes sense at some point to chat through like creative strategy as like a standalone because it's arguably one of the biggest variables in trying. Yeah, it's another, it's another hour. But like, again, this comes down to like understanding the priorities of your business. Like for example, hypothetical scenario, you want to maximize growth rate and profit. Okay. Well, what is the singular best thing that I sell?
Jacob Paduch (40:48.359) That's another hour right there.
Dylan Byers (41:03.745) the most effectively with the best unit economics in relation to LTV and acquisition costs. I'm only going to sell that. I'm only going to make creative for that. And I'm going to forget every other product I sell. Like, well, okay, like you have other products that you sell. You probably do not have infinite numbers of that top best offer. So normally the creative is going to be somewhat dependent on like fundamentally what offer you want to push and why. And usually it's going to start with which one is like the best, the best, you know. investment and that's usually going to be that that that that highest ROI option. But then second to that is going to be like, you might want to have some diversification. So like, not every product is going to be like the top seller forever, especially in certain categories. So you want to start kind of investing and trying to have like an investable funnel on some of the other products. So like that step two is like making sure you're having creative for those future bets. And like the last one is maybe like I just have way too much of this thing and I have to sell it. I've tried very hard to sell it on email and SMS. And how do I try to ideally just move these units without losing money? And that's kind of like sometimes a third focus. And hopefully you don't have that happen too much. Again, it's more common in certain industries, less common in CPG, more common in clothing and apparel. But like that's generally the workflow in terms of like the types of creative or what we're making creative for in terms of products. And then backing up from there is like, okay, like. How many creatives are we making this month that are just like variations of current top performers? What are some of the big swing new concepts we want to make that we haven't necessarily tried in the account before that have a chance of just completely flopping because they're more creative creatives in nature. But they also have a higher chance of potentially being like substantially better than something we've tried before because we haven't tried anything like it before. So it's kind of finding that sweet spot in terms of how you could balance those two things. Naturally, if you're a brand new brand, or a younger brand, you're going to have less historical data to operate off of. So you're probably going to be taking these bigger swings, so to speak. But then as you get bigger at the same time too, you can afford to take even bigger swings depending on some of the types of production you can do. So yeah, high level, that's kind of like the process we kind of work backwards from.
Jacob Paduch (43:14.377) I think one thing worth mentioning that you brought up is like the, the offer and the product are not siloed, right? Like for example, a product that may only sell because it's unit economics only work in a bundle. Well, is that an offer? Is that a product feature? They're, they're the one in the same, right? Offer and product are not two different things. So I think that's oftentimes something that's overlooked. And then also, how do you think about SKU count in a store? You need to be launching new products at some rate and testing. But at the same time as well, it would seem like more SKUs equals more problems, more headache, more working capital challenges. You definitely want to prioritize the SKUs that sell, and you want to test at some pace new SKUs that may sell better in the future, and also create some defensibility in your business if, for example, you see that maybe a certain category is not trending the way it needs to. But at the same time, you also don't want to just be extremely overweight on inventory relative to your cash. So, and then also you still want to be doubling down on winners. So how should brands think about like skew count in a store?
Dylan Byers (44:21.921) Yeah. I think that you have to understand there's a difference between acquisition products and retention products. So some products are going to be great to return customers and some products are going to be great to first time customers. And sometimes there's going to be products that are great to both, but I'm trying to basically prioritize. Again, it depends where you're at, right? Like if you have great LTV, at some point, you probably just need to get more acquisition going. If you're great at acquisition, but have terrible LTV. At some point you have the need to make more contribution margin dollars on that first order via probably higher AOV and or higher LTV via new products. So I think that like for stores where you have like a really loyal customer base, you can de-risk some of these POs a little bit more because you have a higher probability of selling through them on return customers when you do launch some of these new products. And sometimes you can use some of that data of like, my customer base liked this. There's sometimes the correlation with it then being a product that might work on acquisition, especially depending on which category you're in. So you can test it that way where like, if you're really trying to find like popular SKUs, it's like just do a lot of like small POs, but use that data that you get as you do them to understand which ones you should probably like, A, restock, because some of them you may not restock at all, but then B, like make a bigger bet because there's a chance it works on acquisition. And maybe in that first PO, you're making a big enough PO to sell it to the return customers. but also have a little bit left over to test it in the ad account. So there's like those dynamics in terms of how you think about expanding your catalog. Just because you expand doesn't mean you can't take it back. You don't always have to restock things. I think sometimes merchants think they have to restock something. It's like, no, you do not have to. Idealistically, maybe, but at the end of the day, you have finite cash. So you'd rather invest that cash in nothing that's gonna get you the highest return on invested capital. So at a high level, think that like SKU expansion, in certain categories is important, but it's more like testing new SKUs and then learning quickly and adjusting, not necessarily having like this never-ending expanding catalog that you always replenish. So finding that kind of sweet spot between, you know, keeping the cash that's coming in going back towards that thing that's actually working already, but also trying to reach for diversification.
Dylan Byers (46:38.593) I think like clothing and apparel as a category is one where you have to be kind of more aggressive with the testing and the ideation and the new things, because what's trendy this year may not be trendy next year. Another reason why the category is, you know, in my opinion, from a cashflow planning standpoint, sometimes more difficult. Whereas a CPG, I think some of those products have a little bit more staying power and can stand the test of time in certain scenarios, assuming you're not on like... some like super short term trend or wave that's causing a certain food or beverage to all of a sudden be super popular. And in those situations, maybe you have to be a little bit more aggressive with the keyword I would say is staying power. Like what's the probability of this product being equally popular in five years? And obviously like things trend up and down no matter what. So it's also impossible to say with certainty, but there are some products that just are more likely to stay more stable, if that makes sense.
Jacob Paduch (47:30.237) Yeah, for sure. So as we wrap here, any final thoughts brands, founders, operators should think about when trying to build durable revenue and equity in their DTC brands.
Dylan Byers (47:41.869) High level is just making sure that you actually understand A, what you're trying to optimize for, because depending on what you're trying to optimize for, whether it's more profit today, more growth today, or more equity value tomorrow, there's sometimes a different approach to how you might want to think about growing your business, financing your business, taking risk in your business. And I think that like, not everyone's end outcome is the same in terms of what they're trying to achieve. And being kind of Having a strong core understanding of what that is, is important to you that are kind of North Star to build a growth strategy behind. Having kind of all the options on the table is, I guess at any time the options are always on the table. You can always kind of, you know, change your mind, but having that North Star that you're shooting towards, I think is important. So that's like the main thing I would say.
Jacob Paduch (48:32.463) Awesome. Dylan, this was great. I think that's the episode.
Dylan Byers (48:36.365) Thanks Jacob. Awesome. Thanks guys.
Jacob Paduch (48:38.25) Thanks guys.
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